Another quarter of record GPM
- 2Q22 NP of S$32m (-8% yoy) above expectations; key surprise was record GPM of 30.2% (+1.2% pts yoy) led by continued sales mix improvement.
- Strong GPM may be sustainable as fresh goods sales remain strong despite economy reopening. Downtrading behavior bodes well for house brand sales.
- We upgrade from Hold to Add with a higher TP of S$1.85. We view SSG as a defensive play amid rising inflation and potential economic slowdown.
2Q22: Another quarter of record GPM
Sheng Siong’s (SSG) 2Q22 net profit fell to S$32m (-8% qoq, -8% yoy) due to normalisation of grocery demand with the relaxation of Covid-restrictions in Singapore, which led to revenue declining 7% yoy to S$326m. Nevertheless, we deem the results as above expectations, with 1H22 net profit of S$67m (+2% yoy) forming 61%/54% of our/Bloomberg consensus FY22F. Key surprise was further expansion of gross margin (GPM) to a record 30.2% (+1.3% pts yoy), which management attributed to continued improvement of sales mix towards higher margin categories (fresh goods, private label).
Stronger GPM could be sustainable
In our view, strong GPM in 2Q22 reflects its successful execution of pricing strategy, with cost increments passed on to consumers while retaining its perception of value for money vs. supermarket and wet market peers. We lift FY22F GPM to 29.7% (+1.2% pts yoy) as we now think stronger GPM can be sustainable, vs. previous expectation of flattish GPM (concerns over reversal of sales mix changes with reopening of economy leading to more eating out). While economy reopening in 2Q22 has indeed led to smaller average basket sizes, SSG notes that sales mix from fresh goods remained high at 45-50%. In view of rising inflation, SSG has also been more proactive in promoting its house brand to target cost-conscious customers; this helped its revenue mix improve to 7% in 1H22.
Construction recovery opens up opportunity for more store adds
SSG added two stores YTD (adding 20k sq ft retail area) and is set to open another in 3Q22F. With recovery in construction activity, we expect the Housing & Development Board (HDB) to release more store leases for bidding in 2022/23F. SSG currently has 4 outstanding tenders, which we think is supportive of its target to open 3-5 new stores p.a. for the next 3 years. SSG’s China operations saw yoy profitability remain comparable in 1H22 despite Covid-restrictions, and it plans to further expand its presence in Kunming.
Upgrade from Hold to Add; TP raised to S$1.85
We lift our FY22-24F EPS by 13.9-16.3% on the back of higher GPM assumptions. Upgrade SSG from Hold to Add, as we view it as a defensive play amid current backdrop of rising inflation and potential economic slowdown. Our TP is raised to S$1.85 due to higher EPS forecasts, still based on 21x CY23F P/E (10-year historical mean). Re-rating catalysts include faster-than-expected store openings and continued GPM expansion. Downside risks include weaker than expected sales amidst elevated demand tapering off.